The Picken's Plan - A Look at Energy Realities
T. Boone Pickens has an energy plan and he should be commended for it. More policy makers and influential individuals should do so. Visions and ideas should be explored and discussed.
The essence of the Pickens Plan is to replace one-third of our foreign imports of oil with natural gas fired vehicles. In turn, natural gas produced electricity is replaced with wind power. Pickens believes that this transition can be accomplished in 10 years.
Wind power currently produces some 1 percent of the nation’s electricity. So, to produce an additional 21 percent in the next 10 years would require a gargantuan effort. But, what would be the impact on natural gas?
Let’s look at the numbers involved for natural gas. According to the Pickens Plan, we use 21 million barrels of oil per day of which 70 percent is imported. (I note that the Energy Information Administration uses 60 percent net imports, 30 percent of which comes from Canada and Mexico.) Thus, according to Pickens, we use approximately 15 million barrels of imported oil per day. At the same time, we consume on average about 62 billion cubic feet of natural gas per day. A barrel of oil is equal to 5,487 cubic feet of natural gas. Thus, to displace one third of our imported oil would require approximately 27 billion cubic feet of natural gas per day or close to 44 percent of our current natural gas consumption. This doesn’t take into account that gas consumption to produce electricity is projected to increase by 10 to 25 percent in the next 10 years.
Under the Picken’s Plan, since wind would replace natural gas used for electricity, theoretically it would be a wash in terms of our natural gas supply and prices. But, I wonder whether this is feasible in light of certain energy realities.
Here are three points to consider:
- A significant amount of natural gas fueled electricity is for summer peaking units. These units are held in reserve and turned on instantaneously during peak usage periods, generally in the summer. Without innovations in storage, it is doubtful that wind power would be able to perform this critical function for electric utilities; Wind power is intermittent and is non-dipatchable. This means that it can’t always be used when it is needed. To make matters worse, electricity traditionally peaks during July and August, which is the lowest month for sustained winds. Thus, natural gas would be required anyway as a back-up fuel. And, finally, wind is more difficult to transmit and would require substantial and expensive new transmission lines.
- Wind is considerably more expensive than natural gas -- some put wind at five times the price of natural gas, especially when you factor in the price of new transmission and the cost of so-called shadow generation. Thus, already high electric bills will be strained.
- Natural gas prices are already at record highs. In the summer, natural gas is used to meet both electricity demand and to fill storage for winter consumption. If 44 percent of natural gas is used for motor fuels, which itself peaks during the summer, the strain on natural gas prices may be well substantial. This would both adversely impact residential consumers as well as industrial and commercial end-users who must rely year round on natural gas.
Don’t get me wrong. Personally, I am all in favor of wind power and think it is a critical element to a balanced energy plan. It’s just that broad and ambitious plans require a fuller understanding of energy realities.
Oil, Climate, and the Politics of Greening Gasoline
It had to happen, and not a minute too soon. Oil prices are soaring, if you hadn't noticed, and the stock market is in a steep dive as a result. The major airlines have sent a remarkable email letter to their customers (and who isn't one?) asking them to agitate for regulation and enforcement to combat oil costs’ T. Boone Pickens, who can afford to field a private army, has declared war on oil with his strategy to pincer OPEC between wind on one side and domestic natural gas on the other. The candidate who jumps out ahead to answer Pickens' challenge will win the election ("it's the cost of gasoline, stupid") and garner the credit next spring when prices come down. The problem is, rolling back the price of oil and gas will cause greenhouse gas emissions to rise. Some have suggested “greening gasoline” by letting the price of a barrel of oil stay high but imposing a tax -- some say a windfall profits tax will do the job -- that is earmarked for further carbon reduction projects.
They began arriving on July 9th. First Delta Airlines and then United and the rest of the airlines. The letters are remarkable, even extraordinary. They ask airline customers to pressure Congress to act to curb speculation and vigorously regulate oil futures. The airlines say that laws to "control excessive, largely unchecked market speculation and manipulation" were put in place seventy years ago but that "over the past two decades these regulatory limits have been weakened or removed." They point to a new lobbying organization, S.O.S. NOW, and ask customers to write their congresspersons and take action. Does this sound familiar? Yes, if you have ever received urgent campaign mail from environmental organizations seeking your help in convincing Congress to act on one of their causes. The airlines write:
Today, oil speculators purchase 66 percent of all oil futures contracts, and that reflects just the transactions that are known. Speculators buy up large amounts of oil and then sell it to each other again and again. A barrel of oil may trade 20-plus times before it is delivered and used; the price goes up with each trade and consumers pick up the final tab. Some market experts estimate that current prices reflect as much as $30 to $60 per barrel in unnecessary speculative costs.
It is extraordinary that the letter comes from so many high-level executives in the airlines. It has a whiff of desperation in it. How unusual to have conservative businessmen of high corporate rank calling for federal regulation and enforcement of any economic sector. The plain message is that speculators control the market and are responsible for the price of oil today -- quite a claim that warrants close examination by Congress or other groups such as the National Commission on Energy Policy or the Energy Future Coalition. If speculation is the heart of the difficulty, then the airlines are not the only sector hit. The airlines dominate the list of organizations supporting SOS NOW, but a closer look shows the organization’s membership is also a little pregnant with agricultural, labor, and other interests. But some major sectors are still missing, such as chemicals.
Exit the airlines, enter T. Boone Pickens. To fanfare in USA Today, Pickens has announced his Pickens Plan to beat the oil crisis with a one-two punch from wind and natural gas. Like the airlines, he has a website, and a plan to be on TV more often than Obama and McCain. "Neither presidential candidate is talking about solving the oil problem. So we're going to make 'em talk about it," Pickens says.
To the delight of the American Wind Energy Association, Pickens says the US can produce enough wind power within a decade to be able to divert twenty percent of the natural gas used to fuel power plants to fueling cars and trucks. Pickens wants to see a third of all vehicles powered by natural gas within a few years, if the distribution system can be put in place.
Pickens, of course, has business interests in both wind and natural gas but says at his age and with over four billion dollars net worth, his Pickens Plan is not a booster plan for his financial interests. Pickens is building what would be the world's largest wind farm near Pampa, northeast of Amarillo in the Texas Panhandle. USA Today reports he has spent two billion dollars on the project, including purchase of almost 700 wind turbines this year from General Electric. He will invest up to $10 billion in the project and generate electricity by 2011.
What do the candidates for president say about all this? Very little yet, except splitting over the idea of a gas tax holiday, with Senator McCain and ex-candidate Senator Clinton for it and Senator Obama, sensibly, we think, against it. But is it too much to predict that the candidate that jumps out front to lead on this issue will win the election in November? President Clinton's staff famously admonished themselves over sixteen years ago in setting his campaign priorities that "it's the economy, stupid." This year “it's the price of gas, stupid.” Moreover, the candidate who jumps on this and gets elected will probably be able to claim major credit within his first hundred days, according to the report of Agence France Presse that the International Energy Agency and OPEC predict that oil demand will slacken next spring, sending oil prices lower.
What is the relevance to climate change, you have been impatient to ask? Plenty. Any solution that emerges from the efforts of the airlines, T. Boone Pickens, Congress, the President, the candidates, and the host of others seeking a solution -- will be bad for greenhouse reduction. Congress is searching for solutions to both the economic problem -- voters bankrupting themselves at the pump and the nation sending $700 billion a year abroad to buy oil primarily from the Middle East -- and the climate problem. If it solves only the first problem, it worsens the second.
The problem is, Congress has yet to consider a win-win solution. To achieve such a solution, some have suggested that it’s best if we leave the price of oil high and recover the windfall the oil companies receive in the form of a tax that in turn is earmarked for investment in climate-friendly technologies and projects to “green” the tax proceeds. It could be called a windfall profits tax or a green gasoline tax, but whatever it is called, it would achieve precisely the benefits a direct carbon tax such as the one Congressman Dingell once proposed (as a provocation) and then withdrew -- an incentive to drive less, buy less-polluting vehicles, and use less oil and gas. Thus what critics almost universally say is a political non-starter, i. e., a direct federal tax on carbon fuels, could be indirectly achieved, at least for oil and gas, in two steps by tolerating the high price of oil and gasoline but building a large green fund from the tax on the oil companies.
The green gas tax will not solve the balance of payments and energy independence concerns that deserve the most serious consideration, but by deliberate design it would give a stimulus to the types of technologies that would both help the US achieve a greater measure of energy independence and thus ultimately bring down the price of oil: wind and solar, biofuels, further conservation, flex fueled vehicles, a hydrogen fuel economy, and clean-coal plants. The one-two punch of a green gas tax and the auction of a significant portion of the carbon emissions rights created by federal and state climate legislation would put the nation firmly on the path to a responsible greenhouse gas reduction program and a greater measure of energy independence and weaning from Middle Eastern oil.
One last hurdle exists -- keeping revenues firmly linked to the environmental and energy objectives they would be used to pursue. A green gas tax and its dedicated revenues nicely link climate protection, green technology, and energy conservation, but the temptation to use the revenues to offset the costs of other expensive social programs may be very strong with a new Congress and new administration. For example, one member of the House Ways & Means Committee spoke recently of taxing carbon emissions in lieu of cap-and-trade and using at least some of the funds generated to offset payroll tax increases that may be necessary to fund existing or expanded entitlement programs. The pressure on entitlements, for which the Ways & Means Committee has principal responsibility, is finally starting to be felt. Naturally, that Committee looks toward taxation since tax legislation would bring the funds generated under the Committee’s jurisdiction.
The revenues that would be created by defining carbon emissions as units of value to be either taxed or traded would, either way, be enormous. It will take leadership from the new White House to unify congressional leaders and avoid diverting the funds from investment in green technology and reducing our reliance on foreign oil to other legislative objectives. If the new president is Democrat, as not a few prognosticators are predicting, his first priority may well be funding health care and in particular expanded Medicare and Medicaid programs. The revenues generated by either a carbon tax or by auction of emission rights under cap-and-trade may tempt the new president, who could try to kill two birds with one stone by launching a US climate program (tax or trade) and funding health care reform with the proceeds.
